HydroDec Group plc Pre-close Trading Update (4040U)

TIDMHYR

RNS Number : 4040U

HydroDec Group plc

29 March 2019

29 March 2019

Hydrodec Group plc

("Hydrodec", the "Company" or the "Group")

Pre-close Trading Update

Hydrodec Group plc (AIM: HYR), the cleantech industrial oil re-refining group, is pleased to provide a trading update for the financial year ended 31 December 2018.

Introduction

In early 2018 the Board determined that a turnaround strategy was required to position Hydrodec to maximise its ability to address the full potential of its markets with its world leading re-refining technology. The process was regarded as requiring two years to deliver.

Chairman Lord Moynihan took on an executive role and David Dinwoodie was appointed initially as Chief Financial Officer and later as Chief Executive Officer. They conducted a fundamental review of the Group, completed in August, and determined a refinancing of the business was required. This would provide the necessary funds to pay down debt in the business to provide a solid financial platform, improve supplies of feedstock and rebalance the Company's stake in Hydrodec of North America (HoNA) to strengthen operational control of the Company's key facility. This transaction was successfully completed in the autumn and, in December, Hydrodec's ownership interest in HoNA was renegotiated from 58% to 85%.

Having completed these key initial aspects of the turnaround strategy, 2019 will see a focus on delivering substantial feedstock uplift which will help underpin the Company's US utility-targeted strategy, supported by its generation of carbon credits. As part of this process, recent appointments have been made at Canton reflecting a heightened focus on marketing and feedstock procurement.

Demonstrable progress has been made already reflecting the benefit of these changes, and the Company is pleased to announce that it has agreements for more than 400k gallons of feedstock from two US Department of Energy contracts due to commence in April.

On 21 December 2018, President Trump signed a bi-partisan Bill calling for a 12 month review of the Government's oil recycling strategy which the Company sees as a highly significant opportunity to promote its US strategy, aligning its aims with the sustainability agenda of customers in the US. This agenda's increasing profile is seen as hugely positive by the Board for the Company's activities in the US in 2019.

Unaudited Highlights for year ended 31 December 2018

   --     Significantly increased ownership interest in HoNA from 58% to 85% 

-- Completed a fundamental review of the business and its financing, culminating in a placing and open offer, which raised approximately $14.5 million cash

-- Group adjusted EBITDA from continuing operations on a normalised basis was broadly in line with the prior year. The adjusted EBITDA loss of approximately US$1.1 million (2017: loss of US$0.02 million) was principally driven by one-off corporate costs associated with business reorganisation and the strategic review

   --     Strong commercial and operational performance at Canton when feedstock secured: 

o Revenues increased by 10.5% to approximately US$14.9 million (2017: US$13.4 million), driven by improved pricing and sales mix

o Gross unit margins in Canton increased by 25 bps from 12.8% to 13.1%

o Sales volumes of premium quality SUPERFINE transformer oil and base oil in 2018 lower at 23.0 million litres (2017: 25.6 million litres), reflecting previously announced feedstock constraints - demand for SUPERFINE products remains strong and management are confident that all potential production volumes can be sold at prevailing prices

o Operating EBITDA in HoNA was US$1.53 million (compared to US$1.52 million in 2017) as the general operating environment for oil related businesses positively impacted the Group's pricing and margins in 2018 and offset the lower volumes

o Further improvement in sales mix between higher margin transformer oil and lower margin base oil, with transformer oil sales in continuing operations representing 67% of total oil sales in 2018, up from 58% in 2017

o Plant utilisation rates averaged 54.9% for the year. Feedstock remains the key constraint to higher throughput but significant progress is being made in securing sustainable, increased supplies going forward

-- Corporate costs were higher in the year at US$2.67 million (2017: US$1.41 million) owing principally to one-off costs described above. Corporate costs are expected to fall below previous levels in 2019 and management will seek to make additional savings throughout the year

-- Proceeds of the first sale of carbon credits in respect of credits generated by production in 2013 were received in July 2018. Management expect carbon credits to be a key differentiator of Hydrodec's offering in the future

Outlook

This update confirms demonstrable progress in achieving the objectives set out in our strategic plan.

The current year has seen a slow start for feedstock collections owing to cold weather caused by the polar vortex across the US Midwest and short-term issues related to Venezuelan oil. The Group however is pleased to report that all six trains came on line this week. Accordingly, daily feed rates are now well ahead of this time last year.

There is a relentless focus on increasing feedstock supply and the business will prioritise volumes ahead of margin over the next six months. While there will continue to be challenges in what is still a volatile market, the team is demonstrating success in building a network of feedstock suppliers with a strong pipeline including more than 400k gallons of feedstock from two US Department of Energy contracts due in April.

The Australian sales process is progressing at a slower pace than envisaged owing to disputes in accessing the site and because the plant has not been operated by our tolling partner Southern Oil Refining for a number of months. Management anticipate bids for the Australian business being received shortly and are also exploring the potential relocation of the plant to the USA; and will be in California in April to move discussions forward.

David Dinwoodie, Chief Executive Officer of Hydrodec, commented: "I am pleased to report that Hydrodec has begun to deliver on the milestones set out in our strategic review. We have successfully renegotiated the ownership and governance structure of HoNA and are building a wider range of key relationships in the market. As demonstrated by the agreements for more than 400k gallons of feedstock from two US Department of Energy contracts due to commence in April, we are already seeing the green shoots of growth in feedstock supply and I am confident that volumes and therefore production will exceed our original expectations. As such, 2019 will prove to be an exciting year for the business as we build on the work undertaken following the review."

For further information, please contact:

Hydrodec Group plc [e-mail]

Lord Colin Moynihan, Executive Chairman

David Dinwoodie, Chief Executive Officer

   Arden Partners plc (Nominated Adviser and Broker)                      0207 614 5900 

Ciaran Walsh

Alex Penney

   Vigo Communications (PR adviser to Hydrodec)                               020 7390 0230 

Patrick d'Ancona

Chris McMahon

Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process principally targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. MarketsandMarkets forecasts that the global transformer oil market is expected to grow from US$1.98 billion in 2015 to US$2.79 billion by 2020 at a CAGR of 7.14% from 2015 to 2020. Used transformer oil is processed with distinct competitive advantage delivered through very high recoveries (near 100%), producing 'as new' high quality oils at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international regulations.

In 2016 Hydrodec received carbon credit approval from the American Carbon Registry ("ACR"), enabling its product to be sold with a carbon offset and creating an incremental revenue stream. The Group is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. This is a highly distinctive feature for the Group, confirming (as far as the Board is aware) Hydrodec as the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.

Hydrodec's main operating plant is located at Canton, Ohio, US.

Hydrodec's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

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March 29, 2019 03:01 ET (07:01 GMT)